Market order

A market order is a buy or sell order to be executed by the broker immediately at current market prices. As long as there are willing sellers and buyers, a market order will be filled.

A market order is the simplest of the order types. Once the order is placed, the customer has no control over the price at which the transaction is executed. The broker is merely supposed to find the best price available at that time. In fast-moving markets, the price paid or received may be quite different from the last price quoted before the order was entered.^[1]

A market order for a large number of shares may be split by the broker across multiple participants on the other side of the transaction, resulting in different prices for some of the shares.

Limit order

A limit order is an order to buy a security at no more (or sell at no less) than a specific price. This gives the customer some control over the price at which the trade is executed, but may prevent the order from being executed ("filled").^[2]

A buy limit order can only be executed by the broker at the limit price or lower. For example, if an investor wants to buy a stock but doesn't want to pay more than $20 for the stock, the investor can place a limit order to buy the stock at any price up to $20. By entering a limit order rather than a market order, the investor will not be caught buying the stock at $30 if the price rises sharply.

A sell limit order can only be executed at the limit price or higher.

A limit order to buy may never be executed if the market price surpasses the limit before the order can be filled. Because of the added complexity, some brokerages will charge more for executing a limit order than they would for a market order and may make additional charges if the order goes unfulfilled.

Both buy and sell orders can be additionally constrained. Two of the most common additional constraints are Fill Or Kill (FOK) and All Or None (AON). FOK orders are either filled (partially or completely) on the first attempt or canceled outright, while AON orders stipulate that the order must be completely filled or not filled at all (but still held on the order book for later execution).

An Order Book Is a list of open unshipped customer orders, normally time-phased and valued at actual individual order prices, that may include margin and profitability analysis. Order Book may also refer to the system (generally a computer system) operated by many Stock Exchanges for storing and matching the various kinds of order (such as limit orders or market orders) that can be placed on such an exchange.

Time in force

A day order (the most common) is good only for one day. It is in force from when it is entered to the end of regular trading on the same day. A day order is assumed unless another type is specified.

A good-till-cancelled order requires a specific cancelling order. It can persist indefinitely (although brokers may set some limit, for example, 90 days). This is good for when the investor wishes to sit on the beach for a few weeks.

Most markets have single-price auctions at the beginning ("open") and the end ("close") of regular trading. An order may be specified on the close or on the open, then it is entered in an auction but has no effect otherwise. There is often some deadline, for example, orders must be in 20 minutes before the auction. They are single-price because all orders, if they transact at all, will transact at the same price, the open price and the close price respectively.

Combined with price instructions, this gives market on close (MOC), market on open (MOO), limit on close (LOC), and limit on open (LOO). For example, a market-on-open order is guaranteed to get the open price, whatever that is; a buy limit-on-open order will be filled if the open price is lower, will not be filled if the open price is higher, and may or may not be filled if the open price is the same.

Fill-or-kill orders are usually limit orders that must be executed or cancelled immediately.

Conditional orders

A conditional order is any order other than a limit order that requires the broker to check whether a specific condition has been met.

Stop orders

A stop order (also stop loss order) is an order to buy (or sell) a security once the price of the security has climbed above (or dropped below) a specified stop price. When the specified stop price is reached, the stop order is entered as a market order (no limit).

A stop price is the price in stop order that triggers creation of market order. In the case of a Sell on Stop order, when the market reaches or falls below the Stop Price a market sell order will be triggered. For Buy on Stop orders, the stop price triggers the creation of a market buy order when the market price of the stock rises to or above the stop price. In addition if a Stop Limit is also indicated on stop order, the resultant order will be a corresponding limit order as opposed to a market order. [edit] External links

With a stop order, the customer does not have to actively monitor how a stock is performing. However, because the order is triggered automatically when the stop price is reached, the stop price could be activated by a short-term fluctuation in a security's price. Once the stop price is reached, the stop order becomes a market order. In a fast-moving market, the price at which the trade is executed may be much different from the stop price. The use of stop orders is much more frequent for stocks, and futures, that trade on an exchange than in the over-the-counter (OTC) market.

A sell stop order is an instruction to sell at the best available price after the price goes below the stop price. A sell stop price is always below the current market price. For example, if an investor holds a stock currently valued at $50 and is worried that the value may drop, he/she can place a sell stop order at $40. If the share price drops to $40, the broker will sell the stock at the next available price. This can limit the investor's losses (if the stop price is at or below the purchase price) or lock in some of the investor's profits.

A buy stop order is typically used to limit a loss (or to protect an existing profit) on a short sale.^[3] A buy stop price is always above the current market price. For example, if an investor sells a stock short hoping the stock price goes down in order to give the borrowed shares back at a lower price (Covering), the investor may use a buy stop order to protect himself against losses if the price goes too high.

A stop limit order combines the features of a stop order and a limit order. Once the stop price is reached, the stop-limit order becomes a limit order to buy (or to sell) at no more (or less) than a specified price.^[4] As with all limit orders, a stop-limit order will not get filled if the security's price never reaches the specified limit price.

A trailing stop order is entered with a stop parameter that creates a moving or trailing activation price, hence the name. This parameter is entered as a percentage change or actual specific amount of rise (or fall) in the security price. Trailing stop sell orders are used to maximize and protect profit as a stock's price rises and limit losses when its price falls. Trailing stop buy orders are used to maximize profit when a stock's price is falling and limit losses when it is rising.

For example, a trader has bought stock ABC at $10.00 and immediately places a trailing stop sell order to sell ABC with a $1.00 trailing stop. This sets the stop price to $9.00. After placing the order, ABC doesn't exceed $10.00 and falls to a low of $9.01. The trailing stop order is not executed because ABC has not fallen $1.00 from $10.00. Later, the stock rises to a high of $15.00 which resets the stop price to $14.00. It then falls to $14.00 ($1.00 from its high of $15.00) and the trailing stop sell order is entered as a market order.

A trailing stop limit order is similar to a trailing stop order. Instead of selling at market price when triggered, the order becomes a limit order.

Market-if-touched order

A buy market-if-touched order is an order to buy at the best available price, if the market price goes down to the "if touched" level. As soon as this trigger price is touched the order becomes a market buy order.

A sell market-if-touched order is an order to sell at the best available price, if the market price goes up to the "if touched" level. As soon as this trigger price is touched the order becomes a market sell order.

One cancels other orders

One cancels other orders (OCO) are used when the trader wishes to capitalize on only one of two or more possible trading possibilities. For instance, the trader may wish to trade stock ABC at $10.00 or XYZ at $20.00. In this case, they would execute an OCO order composed of two parts: A limit order for ABC at $10.00, and a limit order for XYZ at $20.00. If ABC reaches $10.00, ABC's limit order would be executed, and the XYZ limit order would be canceled.

Tick sensitive orders

An uptick is when the last (non-zero) price change is positive, and a downtick is when the last (non-zero) price change is negative. Any tick sensitive instruction can be entered at the trader's option, for example buy on downtick, although these orders are rare.

Discretionary order

A discretionary order is an order that allows the broker to delay the execution at their discretion to try to get a better price. These are sometimes called not held orders.

Quantity and display instructions

A broker may be instructed not to display the order to the market. For example an "All-or-none" buy limit order is an order to buy at the specified price if another trader is offering to sell the full amount of the order, but otherwise not display the order. A so-called "iceberg order" requires the broker to display only a small part of the order, leaving a large undisplayed quantity "below the surface".

Electronic markets

All of the above orders could be entered into an electronic market, but simple market and limit orders are generally encouraged by order priority rules. Market orders are given greatest priority, followed by limit orders. If a limit order has priority it is the next trade that will be executed at the limit price. Simple limit orders are generally given high priority, based only on a first-come-first-served rule. Conditional orders are generally given priority based on the time the condition is met. "Iceberg orders" and "dark pool orders" (which are not displayed) are given lower priority.

References

Further reading

• Larry Harris, Trading & Exchanges, Oxford Press, Oxford, 2003. Chapter 4 "Orders and Order Properties." ISBN 0-19-514470-8
• U.S. Securities and Exchange Commission Orders accessed 4/21/2007.
• U. S. Securities and Exchange Commission Trade Execution accessed 4/21/2007.